On a Mission to Bring Change to the Fortunes of PEMEX

Q: One of your major roles over the last few years has been aligning the organization and corporate governance structure of Pemex with the 2008 Energy Reform. What do you believe would be the ideal allocation of executive, regulatory, budgetary and monitoring roles?

A: Currently there are too many cooks in the kitchen of Pemex for it to be run eectively as a company. Each of these cooks is following their own recipe, and there is no accountability. What every company needs to do is choose one cook, agree on the menu, agree on the budget for that menu, and then see how successful it is. If no one is coming to your restaurant after two weeks, then you need to hire a new cook. At Pemex, we need to move from a procedure-based system of control and make it simple: present a business plan and a budget, and then bring in results.

Q: Did the introduction of professional board members and the creation of the CNH live up to expectations?

A: My understanding is that the model chosen for the CNH is based on the Norwegian and Brazilian models of regulation. The circumstances in these countries are totally dierent to the Mexican situation, and I would argue that a better model to follow would have been Saudi Arabia, which does not have a regulator in the same way that we have the CNH. There, a body decides on the oil platform that Saudi Aramco has to deliver, which has to be deliverable within three months. After the platform is determined, Saudi Aramco determines how much budget it will need to complete it, and then carries out its plan. In Saudi Arabia, the operator is left alone to work.

I believe that the problem with the CNH as it currently stands is that its mandate is not clear enough: no one is sure whether they should be deciding policy, and if they should then whether they should be doing it on a technical level, or field by field.

The OECD has recommendations for running stateowned enterprises, which state the critical importance of separating the government from the operator and the regulator, like the points of a triangle. To be a good operator, all you need are best practices for operating, and a clear mandate from the government on what your aims should be. The best case studies for the rest should come from the private sector, such as having a board that delivers, and has chemistry that makes it more valuable than the sum of its parts.

Q: One major but often overlooked recent achievement has been the restructuring of Pemex E&P towards processes rather than projects. Why did it take so long for PEP to align its organizational structure with international best practices?

A: Although Pemex generally achieves its objectives, what has always been hard is getting things done. Making changes is always a long process because of the heavy controls on procedure, and the amount of government approval that is required. Pemex E&P has actually been working on its restructuring for close to five years, which is part of a general push on the part of Pemex to move to a more process-based organizational structure. As a result of the 2008 Energy Reform, Pemex started moving towards a more unified corporate service model, where finance reports to finance, HR reports to HR, and IT reports to IT. We realize we have been relatively slow to adopt these international best practices, but the slow implementation has been a result of government insistence on being intimately involved in all aspects of the business.

This situation has not just led to change at Pemex happening slowly; it has also meant that we have planned badly as a result of misguided priorities. Take reserve replacement as an example: it was never a priority for Pemex to replace its production. Pemex was not driven by value creation for many years. Finally, we achieved a reserve replacement this year of more than 100%. People must think that we finally cracked the secret of exploration in Mexico, but the simple truth is that we finally started to invest in exploration.

Pemex may look like its intentions are misguided, but what we are really trying to do is make the best of the hand that has been dealt to us by the government. We are trying our best to do what we can with the potential that we have.

Q: In 2011, Pemex awarded its first integrated service contracts. With this new contracting model, what type of company are you trying to attract in terms of size, experience, technology and financial strength?

A: Pemex is in charge of a very important resource, and all of our strategies are dedicated to finding ways to generate the most value from that resource. We dier from IOCs like ExxonMobil and Shell because these companies look at their capabilities and then choose where in the world they want to operate. Pemex’s situation is the opposite: we have a map of our resources, and we have to find the capabilities to exploit what we have. The gaps between the industry in general and Pemex will show us what needs to be done at each field, whether it is gaining technology and experience to exploit immediately, or building our execution capabilities in order to exploit in the future.

We have a number of different contracts available to us in order to achieve our aims. The first is contracting for certain activities, such as drilling or well completion. We can also contract field laboratories, which is where we bring in a partner to work with us on a given block and try out new ideas over a two to four year period. With this method, we are systematically trying out new technologies. The third type of contract is the integrated service contract, through which we pay our partners a percentage of cost recovery plus a fee per barrel. These contracts were designed for field development, but with the right changes can equally be used for higher risk projects.

The implementation of these contracts varies according to our needs. At Chicontepec for example, we first implemented field laboratories. As a result, today we are comfortable with our understanding of the subsoil, which technologies and techniques work and which do not, and the cost structure. Now, we are ready to grow our operations at Chicontepec, and intend to do this through integrated service contracts.

Q: What is the rationale behind Pemex’s deepwater exploration strategy for 2012?

A: Pemex has been investing in deepwater since 2003, and since that time we have developed our understanding of the regions through techniques such as seismic surveys and exploratory drilling. Today, we understand our portfolio of deepwater locations in terms of ranking and success rate, and as a result know where we should be exploring. One of the reasons we are going to Perdido this year, despite the complexities faced by the water depth at that field, is a result of the promise we have seen after processing the seismic data.

One of the advantages of being late to the party is that you get the best technology from the beginning. This is one of the reasons why Pemex has such a high commercial success rate. Because we have invested in the required technology, we have a good idea of where we need to go. As a result, we have been drilling more in the area off Catemaco and Veracruz, where we had our first deepwater finds. Our other discovery has been heavy crude, a continuation from Ku-MaloobZaap. We are also getting ready to develop Lakach and the other fields around it, as they have potential to produce liquids.

Q: How feasible will it be to use ISCs to contract companies for high-risk E&P projects in deepwater, and what are the opportunities to increase the attractiveness of the contracts for IOCs?

A: We feel that there is enough flexibility in the contracts to make them interesting, even in high-risk exploration projects. Something that we intend to fix soon in the ISCs is the clause that requires us to pay contractors from available income after tax, and move to paying contractors at the point of production. By removing some of these unnecessarily bureaucratic elements, we hope to change the economics and risk of the contracts.

Another aspect we hope to change is to find a way to share some of the exploration risk with companies that want to work with us in deepwater. One idea we have for this is compensating for exploration costs at the moment a project is declared commercial. We are also looking into scaling bids up or down according to the size of the discovery made.

Q: One presidential candidate has talked about Petrobras being a good example for Pemex to follow. Which parts of the Brazilian model have the greatest potential to be applied to Mexico, and where does the comparison fall short?

A: Sometimes, the thing that is forgotten about Petrobras is that since it was established in 1953, it never faced the type of budgetary or taxation restrictions that Pemex did. People that worked in Petrobras were not public servants. These factors restricted the way we could run the company, and procure equipment and services. If we were to move Pemex to the Petrobras model, there would be a huge payout. However, now that the Brazilian government has realized the tax revenues that could come from the oil and gas industry, things are actually starting to look more like the Mexican model year by year. We joke with Petrobras that they were lucky not to have oil – now they do, just wait and see what happens with the government.

It is important to separate the idea of having an eective NOC and having an open industry, with production sharing schemes in place. The latter would involve changing the Constitution. Once we agree on the importance of having a strong NOC, we can discuss opening the sector to competition.

Q: How desirable is increased private sector participation in the sector for Pemex?

A: The only request we would have before opening the sector is to ensure that we would be playing on a level field. We need the ability to get the resources we need. At Saudi Aramco, for example, the vision is that they continue to be the company of choice for extracting Saudi Arabia’s resources. Our vision is that liberalization should not be a critical decision for Mexico to make.

Having a national oil company has its advantages, and explains why almost every oil producing country in the world has decided to stick with the model: it gives the country knowledge and flexibility. When the oil industry in Mexico was first nationalized, it was done because Mexico was becoming a decreasingly attractive country to produce in, in comparison to countries like Venezuela. To depend on the whims of international operators is a dangerous game, and an NOC can mitigate this risk. I do not mean to imply that national oil companies are the only way to run an industry, but as Pemex we would like to run things so eciently that liberalizing the industry fades as a critical decision.

Q: What are the objectives of potential upstream investment by Pemex in other countries?

A: One of the biggest questions surrounding the Mexican oil and gas industry today is whether things would move faster if international companies were able to come to Mexico. Why not reverse this logic? There is no reason why Pemex should be able to work in other countries in order to speed up the learning process. There is a political decision behind the fact that Pemex is the only operator in Mexico. Given our mandate, we have to be sure to develop the skills we need to fully exploit the resources on our geological map. The logic follows, why not go outside to achieve this instead of butting our heads against the political system? We are currently looking at opportunities in the US Gulf of Mexico, and as soon as we are ready, we are certain we will go there. We are also interested in looking at shale gas and tight oil opportunities in the US. Perhaps Pemex is not moving as fast as it could be, but it is not because we like it this way. Rather, it is because of the way the rules are written.